Worked example 1
In a town with one large employer, the competitive wage would be £9 per hour with 5 000 workers employed. The monopsonist pays £7 and employs 3 500 workers. The government sets a national minimum wage of £9.
Using labour market analysis, explain the likely effects on wages and employment. [8 marks]
Show solution outline
Before minimum wage (monopsony):
- Single buyer sets wage where MRP = MC of labour — pays £7, employs 3 500.
- Wage is below MRP — workers are paid less than their contribution to revenue.
Minimum wage at £9 (competitive wage):
- Wage floor binds — firm must pay £9.
- At £9, MRP = wage for up to 5 000 workers — employment can rise from 3 500 toward 5 000.
- This contrasts with a competitive market where a minimum wage at £9 when equilibrium is £8 would cause unemployment.
Key point: In monopsony, minimum wage can correct market power — higher wages and higher employment — up to the competitive level. Beyond that, unemployment returns.